BANK 4.5.14 Capital relief from guarantees
(1) Capital relief is allowed from a guarantee if the guarantor is an eligible guarantor and the guarantee satisfies the criteria in subrules (2) to (4). Before accepting a guarantee, a banking business firm must consider the legal and financial ability of the guarantor to fulfil the guarantee.
(2) A guarantee must be a direct claim on the guarantor and must clearly state the extent of the cover. A letter of comfort is not a guarantee for the purposes of this Division.
(3) A guarantee must be irrevocable. It must not include a term or condition:
(a) that allows the guarantor to cancel it unilaterally; or
(b) that increases the effective cost of cover if the credit quality of the guaranteed exposure deteriorates.
Note The irrevocability condition does not require that the guarantee and the exposure be maturity matched. However, it does require that the agreed maturity should not be reduced by the guarantor after the banking business firm accepts the guarantee.
(4) A guarantee must be unconditional. It must not include a term or condition (outside the direct control of the firm) that allows the guarantor not to indemnify the firm in a timely way if the counterparty defaults.
(5) If a claim on a counterparty is secured by a guarantee, the part of the claim that is covered by the guarantee may be weighted at the risk-weight applicable to the guarantor. The unsecured part of the claim must be weighted at the risk-weight applicable to the original counterparty.
Note This rule applies to a guarantee that provides part coverage under which the firm and the guarantor share losses on a pro rata basis.